For Trump And America’s Frackers, A Successful OPEC Meeting

Donald Trump and America’s oil frackers are driving OPEC crazy. American oil output has surged to a record 11.7 million bpd from 8.5 million just two years ago—an unparalleled supply boom. Not only have the Americans been covering all the world’s oil demand, but they are nibbling at OPEC market share.

None among OPEC want to cut to make room in the market for the Americans (or the Brazilians for that matter). But they know they have to or risk scuttling oil prices further. After two days of wrangling in Vienna, the latest news out of Vienna is that OPEC will indeed agree to cut 1.2 million bpd. That is expected to be enough over the next few quarters to soak up growing inventories.

Chalk this OPEC meeting up as a victory for Trump and U.S. producers, who get some price stability without having to sacrifice any market share. Without a cut, prices could have continued their fall, already down from $75 a barrel in September, to a recent low below $50, before jumping to $53.77 this afternoon (for WTI).

OPEC’s plan to cut is a relief, considering fresh memories from 2014, when OPEC stared America’s fast-growing frackers in the face and refused to cut output, forcing the price down low enough to bankrupt dozens of operators and kill more than 250,000 jobs. But the Americans bounced back quick.

Helping to ensure that the American oilpatch won’t have to go through another depression again is Trump’s newfound leverage over Saudi Arabia’s Crown Prince Mohammed bin Salman (the CIA is said to have evidence he masterminded the Kashoggi killing). Indeed, the Saudis have agreed to shoulder the majority of OPEC’s cuts, about 500,000 bpd, with Russia reportedly agreeing to cut a meagre 200,000 bpd of its 10 million bpd total (probably less than the reductions Russia sees every winter when wells freeze off).

Trump’s influence on oil markets have become legendary, and this year he has largely played the cartel. In April he wrote this: “Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!”

1 in a series. Twitter

In July came this missive: “The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $’s. This must be a two way street. REDUCE PRICING NOW!”

Trump found a way to reduce pricing himself. The Administration, prior to the Kashoggi affair, had been talking with the Saudis about how to prepare for the likelihood of tough U.S. oil sanctions on Iran. The Saudis, according to Trump, agreed to cover any Iranian supply disruption. From June: “Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference...Prices to high! He has agreed!”

When the sanctions date arrived, the Trump instead doled out 180-day waivers. With the threat of Iran supply disruptions lifted, traders found themselves with a big supply cushion but nothing to use it on. Prices collapsed. Trump got to brag that he lowered gasoline prices in time for Thanksgiving.

November 21 tweet: “Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!”

It’s natural that the Saudis cut the most, because it was Trump and MbS’s plotting against Iran that arguably oversupplied the market in the first place. Iran understandably wanted nothing to do with cuts. “It’s the responsibility of the countries that have produced more and more and have collapsed the market with more oil and extra oil and Iran has no responsibility for this situation,” Iran’s oil minister Bijan Zanganeh told CNBC.

Iran later agreed to vote in favor after receiving assurances that the Saudis will take on the brunt. Libya and Venezuela will also be exempt.

The Administration was working toward this outcome. Trump envoy Brian Hook met secretly earlier this week with Saudi oil minister Khalid al-Falih, which the Kingdom first denied. Iran’s oil minister Bishan Zanganeh was not impressed. “If Mr. Hook has come to Vienna to apply for U.S. membership in OPEC, and this is the reason why he meets OPEC members, this request shall be reviewed,” Zanganeh said in an official statement. “Otherwise, he has adopted an unprofessional, naive and meddlesome approach. OPEC is an independent organisation and is not part of the U.S. Department of Energy to take orders from Washington.”

Zanganeh addressing the scrum. AFP/Getty Images

If Hook’s mission was to rile up the Iranians, then mission accomplished.

Naturally the question now is where will oil prices go? Don’t expect a surge upwards unless and until OPEC producers’ compliance with cuts is verified. And then there’s the ever-present concern that even these low prices remain just high enough to spur additional American output, but not high enough to pay for monumental social-placation programs. According to the results of the recent Federal Reserve Bank of Dallas energy survey of oil companies, the average operator needs to see oil prices at $55 in order to have confidence in profitably drilling a new well.

The Saudis needs something more like $85 oil to balance their record $260 billion budget. If it stays too low for too long MbS may have to tighten his belt and pawn that $450 million DaVinci, $300 million French chateau and $500 million yacht. Al-Falih told reporters today that although OPEC might make a big cut for a short time, they have no intention of making enough room for U.S. shale to grow 2 or 3 million more barrels per day. We’ll see.

America’s oilmen tolerate Trump’s calls for lower oil prices, because they know that he wants America to be the world’s biggest oil producer. Yesterday I met with Austin oilman Bud Brigham, who has already made a couple fortunes in the Bakken and Permian and hopes Trump keeps up the pressure on OPEC. “Imagine if we had had a different administration and fracking had been overregulated or even banned. Oil prices would be over $100 a barrel, the economy would not be growing at 3%, we would not have full employment,” says Brigham. “We’re exporting oil. That accrues substantial benefits not just to our economy but also to national security, and freedom around the world.”

Donald Trump and America’s oil frackers are driving OPEC crazy. American oil output has surged to a record 11.7 million bpd from 8.5 million just two years ago—an unparalleled supply boom. Not only have the Americans been covering all the world’s oil demand, but they are nibbling at OPEC market share.

None among OPEC want to cut to make room in the market for the Americans (or the Brazilians for that matter). But they know they have to or risk scuttling oil prices further. After two days of wrangling in Vienna, the latest news out of Vienna is that OPEC will indeed agree to cut 1.2 million bpd. That is expected to be enough over the next few quarters to soak up growing inventories.

Chalk this OPEC meeting up as a victory for Trump and U.S. producers, who get some price stability without having to sacrifice any market share. Without a cut, prices could have continued their fall, already down from $75 a barrel in September, to a recent low below $50, before jumping to $53.77 this afternoon (for WTI).

OPEC’s plan to cut is a relief, considering fresh memories from 2014, when OPEC stared America’s fast-growing frackers in the face and refused to cut output, forcing the price down low enough to bankrupt dozens of operators and kill more than 250,000 jobs. But the Americans bounced back quick.

Helping to ensure that the American oilpatch won’t have to go through another depression again is Trump’s newfound leverage over Saudi Arabia’s Crown Prince Mohammed bin Salman (the CIA is said to have evidence he masterminded the Kashoggi killing). Indeed, the Saudis have agreed to shoulder the majority of OPEC’s cuts, about 500,000 bpd, with Russia reportedly agreeing to cut a meagre 200,000 bpd of its 10 million bpd total (probably less than the reductions Russia sees every winter when wells freeze off).

Trump’s influence on oil markets have become legendary, and this year he has largely played the cartel. In April he wrote this: “Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!”

1 in a series. Twitter

In July came this missive: “The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $’s. This must be a two way street. REDUCE PRICING NOW!”

Trump found a way to reduce pricing himself. The Administration, prior to the Kashoggi affair, had been talking with the Saudis about how to prepare for the likelihood of tough U.S. oil sanctions on Iran. The Saudis, according to Trump, agreed to cover any Iranian supply disruption. From June: “Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference...Prices to high! He has agreed!”

When the sanctions date arrived, the Trump instead doled out 180-day waivers. With the threat of Iran supply disruptions lifted, traders found themselves with a big supply cushion but nothing to use it on. Prices collapsed. Trump got to brag that he lowered gasoline prices in time for Thanksgiving.

November 21 tweet: “Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!”

It’s natural that the Saudis cut the most, because it was Trump and MbS’s plotting against Iran that arguably oversupplied the market in the first place. Iran understandably wanted nothing to do with cuts. “It’s the responsibility of the countries that have produced more and more and have collapsed the market with more oil and extra oil and Iran has no responsibility for this situation,” Iran’s oil minister Bijan Zanganeh told CNBC.

Iran later agreed to vote in favor after receiving assurances that the Saudis will take on the brunt. Libya and Venezuela will also be exempt.

The Administration was working toward this outcome. Trump envoy Brian Hook met secretly earlier this week with Saudi oil minister Khalid al-Falih, which the Kingdom first denied. Iran’s oil minister Bishan Zanganeh was not impressed. “If Mr. Hook has come to Vienna to apply for U.S. membership in OPEC, and this is the reason why he meets OPEC members, this request shall be reviewed,” Zanganeh said in an official statement. “Otherwise, he has adopted an unprofessional, naive and meddlesome approach. OPEC is an independent organisation and is not part of the U.S. Department of Energy to take orders from Washington.”

Zanganeh addressing the scrum. AFP/Getty Images

If Hook’s mission was to rile up the Iranians, then mission accomplished.

Naturally the question now is where will oil prices go? Don’t expect a surge upwards unless and until OPEC producers’ compliance with cuts is verified. And then there’s the ever-present concern that even these low prices remain just high enough to spur additional American output, but not high enough to pay for monumental social-placation programs. According to the results of the recent Federal Reserve Bank of Dallas energy survey of oil companies, the average operator needs to see oil prices at $55 in order to have confidence in profitably drilling a new well.

The Saudis needs something more like $85 oil to balance their record $260 billion budget. If it stays too low for too long MbS may have to tighten his belt and pawn that $450 million DaVinci, $300 million French chateau and $500 million yacht. Al-Falih told reporters today that although OPEC might make a big cut for a short time, they have no intention of making enough room for U.S. shale to grow 2 or 3 million more barrels per day. We’ll see.

America’s oilmen tolerate Trump’s calls for lower oil prices, because they know that he wants America to be the world’s biggest oil producer. Yesterday I met with Austin oilman Bud Brigham, who has already made a couple fortunes in the Bakken and Permian and hopes Trump keeps up the pressure on OPEC. “Imagine if we had had a different administration and fracking had been overregulated or even banned. Oil prices would be over $100 a barrel, the economy would not be growing at 3%, we would not have full employment,” says Brigham. “We’re exporting oil. That accrues substantial benefits not just to our economy but also to national security, and freedom around the world.”

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